What Happens at Vesting?
When your RSUs vest, their fair market value (FMV) is added to your W-2 as ordinary income. You pay federal, state, and FICA taxes at that point, regardless of whether you sell the shares or hold onto them. However, if you decide to keep the shares instead of selling them immediately, any change in the stock’s price after vesting becomes a capital gain or loss when you eventually sell.
Short-Term Capital Gains
If you sell your RSU shares within one year of the vesting date, any gain is considered a short-term capital gain. Short-term gains are taxed at the same rate as your ordinary income, which can be as high as 37% at the federal level depending on your tax bracket. This means there’s no tax advantage to selling RSUs quickly after vesting from a capital gains perspective. You’ll essentially be taxed twice at ordinary income rates—once at vesting and again on any additional gain if the stock price has increased.
Long-Term Capital Gains
To benefit from long-term capital gains tax rates, you must hold the RSU shares for more than one year after they vest. Long-term capital gains are taxed at lower rates—typically 0%, 15%, or 20%, depending on your income level. This can significantly reduce your tax liability if the stock appreciates in value during that holding period.
Planning Your Strategy
Deciding when to sell your RSU shares depends on a variety of factors, including your financial goals, risk tolerance, and expectations for the company’s stock. If you believe the stock will continue to rise, holding for more than a year could yield tax savings through long-term capital gains. However, if the stock is volatile or you need liquidity, selling sooner—even at short-term rates—might make sense.
Consulting with a tax advisor can help you craft a strategy that balances tax efficiency with financial security.
